Corporate Governance

Proxy Access and Continued Efforts at Circumvention

By J Robert Brown Jr.

The battle over proxy access is coming to a short term end.  Dodd-Frank settled all remaining legal issues.  The Commission is expected to approve access next week.  For the first time, shareholders will obtain the right to include in the company's proxy statement their nominees for the board of directors.

Given the vituperative opposition to access, the efforts to slow or even undermine the new set of rights will continue.  JW Verret at George Mason has made no secret of these efforts, having authored a paper titled Defending Against Shareholder Proxy Access: Delaware's Future Reviewing Company Defenses in the Era of Dodd-Frank.  He has likewise posted some of his thoughts on the topic at Truth on the Market.   We have already discussed one of the posts on this Blog. 

The most recent missive suggests that boards can avoid the use of access through payments to large shareholders.  As he notes:

• "It should be expected that some shareholders threatening to nominate on the corporate proxy would likewise be willing to contract for a side payment in exchange for giving up the contest. This is particularly likely for hedge funds, who are more focused on profits than politically motivated public pension funds.  Since proxy nominations go onto the company's white proxy card, I think a good name for the practice would be 'whitemail' to distinguish it from greenmail."

The bribery approach is a possibility and given the direction of the Delaware courts, likely to be approved (the Chancery Court did so, for example, in Portnoy). 

But in making the suggestion, he is merely providing large shareholders with a road map on how to extort payments from companies to avoid a right that they have little interest in exercising.

His suggestion is not really about access.  Its about buying off shareholders to prevent a proxy contest, a dynamic that already exists and one that ordinarily takes far more than a modest side payment.  Thus, the board at Genzyme recently induced Carl Icahn to forego a proxy contest.  Only to do so, it required the inclusion of two Icahn nominees on the board.  At the same time, however, the inducement did not involve a payment.  The agreement provided that each of the parties would bear their "own expenses related to the proxy contest".  

In fact, side payments are more likely to be effective with shareholders who are not particularly serious about gaining representation on the board and simply want to extort payments from the company.  Thus companies will effectively end up making payments to avoid illusory contests.  Moreover, as was clear in the greenmail era, companies that made the payments were simply hit up time and time again by other shareholders.  Those with a reputation for paying off hedge funds will simply find a longer line of hedge funds at the door waiting for their payment.

Access will be used by all large shareholders but the main advantage of the authority is to the pension plans and other institutional investors that have a long term interest in the success of the company.  These investors, who would ordinarily not be in a position to pay the costs of the contest, can now submit nominees in a cost effective manner.  As JW notes, these investors are not generally susceptible to the side payment problem. 

In short, side payments won't affect the investors benefiting most from access.  It won't affect those investors who seriously want' board representation.  And it will likely cause companies making the side payments to become targets for other investors who have little interest in a contest but considerable interest in a side payment.  

Full post as published by The Race to the Bottom on August 20, 2010 (boomark / email).